Tag Archives: chesapeake energy securities fraud

The founder of Chesapeake Energy Corp. is under fire and has been forced out of his position as chairman of the company’s board of directors for what critics have characterized as serious personal conflicts-of-interests. Among other things, a Reuters’ investigation published in April reported that Aubrey McClendon had taken out as much as $1.1 billion in personal loans on ownership stakes in wells Chesapeake had given to him under a corporate perk called the Founders Well Participation Program. Adding to his conflicts, during part of his time as Chesapeake chairman and CEO, McClendon also ran a hedge fund that traded in the same commodities as the energy company.

According to Reuters, McClendon’s loans were never disclosed to shareholders. What’s more, EIG Global Energy Partners, McClendon’s biggest lender, was in negotiations with Chesapeake about purchasing some of the company’s assets.

About Chesapeake Energy

Chesapeake Energy is the second-largest natural gas producer in the U.S., and is a major developer of oil and gas reserves in Texas, Louisiana, West Virginia, and Pennsylvania. As a founder, McClendon was seen as a driving force behind Chesapeake’s emergence as the second-largest natural gas company in the country. But according to Reuters, shareholders have long complained about the freedom Chesapeake’s board had allowed McClendon to pursue his personal interests.

On May 2, the outcry over the loan disclosures finally forced Chesapeake’s board to act, and McClendon was stripped of his chairmanship. The board also voted to end the Founders Well Participation Program 18 months earlier than originally planned. McClendon, however, has been allowed to remain in his position as Chesapeake CEO.

The Chesapeake board’s decision, however, did end not of the controversy over McClendon’s personal financial dealings. That very same day, a new Reuters report revealed that he had also been operating a $200 million hedge fund that traded in the same commodities Chesapeake produces. The fund, Heritage Management Company LLC, was started by McClendon and Chesapeake co-founder Tom Ward. For at least four years, from 2004 to 2008, McClendon engaged in “near daily” communications and “exhaustive” calls to help direct the fund’s trading, according to Reuters. The fund also listed Chesapeake’s headquarters in Oklahoma City as its mailing address, and employed an accountant who was simultaneously employed by Chesapeake. McClendon and Ward both earned management fees and a cut of profits from the fund’s outside investors.

Chesapeake SEC Investigation

On May 9, yet another Reuters report revealed that in the weeks before he was stripped of his chairmanship, McClendon arranged an additional $450 million loan from EIG. The new loan, secured by Chesapeake wells that have yet to be drilled, as well as his own life insurance policy, brought McClendon’s financing from EIG since 2010 to $1.33 billion.

Chesapeake now faces U.S. Securities and Exchange Commission and IRS investigations, as well as several shareholder lawsuits, because of McClendon’s conduct. Senator Bill Nelson, D-Fla, has also asked his staff to formally request that the Justice Department’s Financial Fraud Enforcement Task Force investigate the Chesapeake Energy Corp. matter to determine whether there is evidence of fraud, price manipulation, conflicts-of-interest, or other illegal activities.

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